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8:30 AM Wednesday, May 11, 2005: Some big hedge funds are in big trouble, according to rumors. Seeing this year's lousy performance (see yesterday's column), investors are taking their money out of hedge funds. Jim Cramer calls them "stupid, rich guys." When hedge fund investors take their funds out, the hedge funds have to sell their holdings. These sales have been the cause of much of the recent market weakness. I'm guessing people will continue taking their monies out well into July. Most hedge funds insist on lengthy and timed notice to get your money back.

It's been hard for hedge funds -- in fact, for anyone -- to make money in recent weeks. Markets have been volatile. Some examples:


General Motors:

Bear Stearns:


How does Yale do it? Yale University earned 19.1% on its endowment in 2004, bringing its 10-year return to 16.8% a year, net of fees. This placed it in the top 1% of institutional investors. An amazing performance. To quote a recent report Yale sent to its alumni,

Yale's portfolio is structured using a combination of academic theory and informed market judgment. The theoretical framework relies on mean variance analysis, an approach developed by Nobel laureates James Tobin and Harry Markowitz. ... Using statistical techniques to combine expected returns, variances, and covariances of investment assets, Yale employs mean-variance analysis to estimate expected risk and return profiles of the results to changes in input assumptions. ...

Over the past two decades, Yale has reduced dramatically the Endowment's dependence on domestic marketable securities by reallocating assets to nontraditional asset classes. In 1984, more than three-quarters of the Endowment was committed to U.S. stocks, bonds and cash. Today target allocations call for 22.5% in domestic marketable securities, while the diversifying assets of foreign equity, private equity, absolute return strategies and real assets dominate the Endowment, representing 77.5% of the target portfolio.

The combination of quantitative analysis and market judgment employed by Yale produces the following portfolio:

Asset Class
June 2004
Current Target
Domestic Equity
Fixed Income
Absolute Return*
Foreign Equity
Private Equity
Real Assets**

* Absolute return investments "seek to generate high long-term real returns by exploiting market inefficiencies. Approximately half of the portfolio is dedicated to event-driven strategies, which rely on a very specific corporate event, such as a merger, spin-off or bankruptcy restructuring, to achieve a target price. The other half of the portfolio contains value-driven strategies, which involve hedged positions in assets or securities that diverge from underlying economic value. ... Unlike traditional marketable securities, absolute return investments provide returns largely independent of overall market moves. Over the past ten years, the portfolio exceeded expectations, returning 12.2% per cent per year with essentially no correlation to domestic stock and bond markets.

"An important attribute of Yale's investment strategy concerns the alignment of interests between investors and investment managers. To that end, absolute return accounts are structured with performance-related incentive fees, hurdle rates and clawback provisions. In addition, managers invest a significant portion of their net worth alongside Yale, enabling the University to avoid many of the pitfalls of the principal-agent relationship."

** Yale defines real assets as real estate, oil and gas, and timberland. Yale says these "share common characteristics: sensitivity to inflationary forces, high and visible current cash flow and opportunity to exploit inefficiencies."

If your hedge fund manager suddenly drives a new Porsche, here's why:
The New York University whiz kid charged in a $43 million bank fraud posed as Turkish royalty and charmed his way into Greenwich, Conn.'s high-stakes investing world, only to leave behind victims — including an "Ali" movie producer, according to court documents and interviews.

His hair a mess and his shirt untucked, Hakan Yalincak, 21, last year told producer Paul Ardaji that he was starting a hedge fund. He boasted financial statements showing a family worth of $800 million and a supposed credit line of $100 million.

Yalincak and his mother wanted to rent office space from him, Ardaji recalled. "They said they were Turkish royalty, the equivalent of the Rockefellers in Turkey," said Ardaji, whose 2001 film "Ali' starred Will Smith. "He had me sold. I thought this kid was going to own the world someday."

But court records show that Yalincak was just a smart kid with a $95,000 credit-card bill and a family with a history of fraud, lawsuits from irate creditors and a house that was foreclosed on because of massive debt.

Still, Hakan Yalincak and his mother set up their Greenwich office last year under the name Yasam Trading, furnishing it with mahogany desks and plush, silk-upholstered chairs. They ordered thousands of dollars in computer equipment, hired temporary workers to monitor the Bloomberg stock tickers and shuttled investors in and out of the conference room.

"They were trying to make inroads with everybody," Ardaji said. "They set it all up, they had their meetings that same day and the next day, and the temps never showed up again. And neither did the Yalincaks."

The computers were never even online, he said. They were just a prop. And the $100 million credit line never materialized, according to documents turned over to the FBI, because Greenwich bankers discovered the application documents were fraudulent.

Yalincak's fund attracted at least $2.8 million from two respected investors who later sued, saying they couldn't get their money. Court documents claim that at least some of the money was used to buy Tiffany jewelry and a Porsche.

Hakan Yalincak, a 21-year-old mathematics major, will be unable to attend his college graduation this Wednesday as he sits in jail awaiting trial.

I pierced the story above together from a number of sources, including the New York Post.

Challenging junk bond status:
Executives at Ford and General Motors today challenged a move by Standard & Poor's to downgrade the big automakers' debt to 'junk' status.

In a teleconference with institutional investors, they made a vigorous pitch for buying what they called "quality-checked" or "certified pre-owned" bonds.

"'Junk bond' has such a negative sound," said an unnamed GM spokesman. "A man can't come home to his wife and say 'Honey, I bought some junk bonds today.' We need to give our non-investment-grade debt a name that conveys prestige, style, success and hope for a better tomorrow."

The executives suggested that investors think of GM and Ford debt as 'creampuff bonds' or 'genuine classic bonds'.

What can you get for a bottle of wine?
Sally was driving home from one of her business trips in Northern Arizona when she saw an elderly Navajo woman walking on the side of the road. As the trip was long and quiet, she stopped the car and asked the Navajo woman if she would like a ride?

With a silent nod of thanks, the woman got into the car. Resuming the journey, Sally tried in vain to make a bit of small talk with the Navajo woman. The old woman just sat silently, looking intently at everything she saw, studying every little detail, until she noticed a brown bag on the seat next to Sally.

"What's in the bag?" asked the old woman.

Sally looked down at the brown bag and said, "It's a bottle of wine. I got it for my husband."

The Navajo woman was silent for another moment or two. Then speaking with the quiet wisdom of an elder, she said, "Good trade."

Harry Newton

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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